A panel set up by the Reserve Bank of India (RBI) has recommended the setting up of an emergency fund to help urban cooperative banks (UCBs) tide over liquidity problems. In addition, it has proposed that a national-level umbrella organisation be set up to provide ATM, investment banking and cash management services to these entities.

A working group headed by RBI Executive Director VS Das has also recommended that the Emergency Fund Facility Scheme can also help banks that fall short of the prescribed capital adequacy ratio.

The fund is proposed to be set up through an agreement between UCBs and state governments. The banks could chip in with 0.05 per cent of their assets. This amount would earn interest, said the group.

These funds would be available to the participating UCBs as a soft loan (liquidity support) carrying interest, which would be around 200 basis points higher than the rate offered on the contribution. The facility would be available to a UCB for six months to a year. The quantum of liquidity might be capped at 50 per cent of net worth, according to the proposal.

While the working group turned down a proposal to set up a revival fund, it said the umbrella organisation to provide services to UCBs could be set up as a non-deposit taking non-banking finance company (NBFC). The company would start with paid-up capital of Rs 100 crore and an authorised capital of Rs 200 crore. The conversion of the umbrella organisation into a banking company could be considered later. It will provide a range of services to UCBs like credit facilities, liquidity to meet short-term mismatches, fund management services, investment banking services, payment and settlement services/gateway, information technology services, ATM network and services, management consultancy, and capacity building services. 

The non-deposit taking NBFC would have access to borrowings from banks and financial institutions, term deposits from UCBs, bonds and debentures, refinance against financial assets (loans and advances), including securities, and other miscellaneous sources for its working capital.

In case of revival fund, the working group said Rs 2,500 crore will be required for UCBs to have a positive net worth.

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